Posts Tagged ‘amazon’

A few weeks ago a postdoc in my lab logged on to Amazon to buy the lab an extra copy of Peter Lawrence’s The Making of a Fly – a classic work in developmental biology that we – and most other Drosophila developmental biologists – consult regularly. The book, published in 1992, is out of print. But Amazon listed 17 copies for sale: 15 used from $35.54, and 2 new from $1,730,045.91 (+$3.99 shipping).

I sent a screen capture to the author – who was appropriate amused and intrigued. But I doubt even he would argue the book is worth THAT much.

At first I thought it was a joke – a graduate student with too much time on their hands. But there were TWO new copies for sale, each be offered for well over a million dollars. And the two sellers seemed not only legit, but fairly big time (over 8,000 and 125,000 ratings in the last year respectively). The prices looked random – suggesting they were set by a computer. But how did they get so out of whack?

Amazingly, when I reloaded the page the next day, both priced had gone UP! Each was now nearly $2.8 million. And whereas previously the prices were $400,000 apart, they were now within $5,000 of each other. Now I was intrigued, and I started to follow the page incessantly. By the end of the day the higher priced copy had gone up again. This time to $3,536,675.57. And now a pattern was emerging.

On the day we discovered the million dollar prices, the copy offered by bordeebook was1.270589 times the price of the copy offered by profnath. And now the bordeebook copy was 1.270589 times profnath again. So clearly at least one of the sellers was setting their price algorithmically in response to changes in the other’s price. I continued to watch carefully and the full pattern emerged.

Once a day profnath set their price to be 0.9983 times bordeebook’s price. The prices would remain close for several hours, until bordeebook “noticed” profnath’s change and elevated their price to 1.270589 times profnath’s higher price. The pattern continued perfectly for the next week.

But two questions remained. Why were they doing this, and how long would it go on before they noticed? As I amusedly watched the price rise every day, I learned that Amazon retailers are increasingly using algorithmic pricing (something Amazon itself does on a large scale), with a number of companies offering pricing algorithms/services to retailers. Both profnath and bordeebook were clearly using automatic pricing – employing algorithms that didn’t have a built-in sanity check on the prices they produced. But the two retailers were clearly employing different strategies.

The behavior of profnath is easy to deconstruct. They presumably have a new copy of the book, and want to make sure theirs is the lowest priced – but only by a tiny bit ($9.98 compared to $10.00). Why though would bordeebook want to make sure theirs is always more expensive? Since the prices of all the sellers are posted, this would seem to guarantee they would get no sales. But maybe this isn’t right – they have a huge volume of positive feedback – far more than most others. And some buyers might choose to pay a few extra dollars for the level of confidence in the transaction this might impart. Nonetheless this seems like a fairly risky thing to rely on – most people probably don’t behave that way – and meanwhile you’ve got a book sitting on the shelf collecting dust. Unless, of course, you don’t actually have the book….

My preferred explanation for bordeebook’s pricing is that they do not actually possess the book. Rather, they noticed that someone else listed a copy for sale, and so they put it up as well – relying on their better feedback record to attract buyers. But, of course, if someone actually orders the book, they have to get it – so they have to set their price significantly higher – say 1.27059 times higher – than the price they’d have to pay to get the book elsewhere.

What’s fascinating about all this is both the seemingly endless possibilities for both chaos and mischief. It seems impossible that we stumbled onto the only example of this kind of upward pricing spiral – all it took were two sellers adjusting their prices in response to each other by factors whose products were greater than 1. And while it might have been more difficult to deconstruct, one can easily see how even more bizarre things could happen when more than two sellers are in the game. And as soon as it was clear what was going on here, I and the people I talked to about this couldn’t help but start thinking about ways to exploit our ability to predict how others would price their books down to the 5th significant digit – especially when they were clearly not paying careful attention to what their algorithms were doing.

But, alas, somebody ultimately noticed. The price peaked on April 18th, but on April 19th profnath’s price dropped to $106.23, and bordeebook soon followed suit to the predictable $106.23 * 1.27059 = $134.97. But Peter Lawrence can now comfortably boast that one of the biggest and most respected companies on Earth valued his great book at $23,698,655.93 (plus $3.99 shipping).

Since then I’ve mentioned this forecast to all kinds of folks. In August, 2010 I had the chance to point it out to Jeff Bezos, CEO of Amazon. He merely smiled and said, “Oh, you noticed that!” And then smiled again.

When I brought it to the attention of publishing veterans they would often laugh nervously. How outrageous! they would say. It must cost something to make? The trick was figuring out how Amazon could bundle the free Kindle and still make money. My thought was the cell phone model: a free Kindle if you buy X number of e-books.

But last week Michael Arrington at TechCruch reported on a rumor which hints at a more clever plan: a free Kindle for every Prime customer of Amazon. Prime customers pay $79 per year for free 2-day shipping, and as of last week, free unlimited streaming movies (a la Netflix). Arrington writes:

In January Amazon offered select customers a free Kindle of sorts – they had to pay for it, but if they didn’t like it they could get a full refund and keep the device. It turns out that was just a test run for a much more ambitious program. A reliable source tells us Amazon wants to give a free Kindle to every Amazon Prime subscriber.

I don’t know if this is Amazon’s plan, but it should be. It brilliantly feeds into Bezo’s long-term strategy of nurturing extreme customer satisfaction. What could be more satisfying that a free Kindle, free movies, and free 2-day shipping for $80 a year? If the past is any indication of future events, expect an as-if-free Kindle this fall in time for the holidays. Brilliant indeed!

UPDATE: I misread the TechCrunch dateline. Arrington’s speculation was from February 2010, a year ago, not last week. Still valid, though.

Also, in the comments Phil Gyford quotes an article from the London Review of Books which makes another interesting free kindle speculation:

“Taking the lower figure, that means that New York Times, if it stopped printing a physical edition of the paper, could afford to give every subscriber a free Kindle. Not the bog-standard Kindle, but the one with free global data access. And not just one Kindle, but four Kindles. And not just once, but every year. And that’s using the low estimate for the costs of printing.”

The chart above sure tells a story. Handing out a free Kindle would be a really bold and brilliant move by Amazon. It would ensure Amazon’s stronghold on the ebooks market and also ease its entry into the movie streaming market, which is currently dominated by Netflix.